Fed's criteria for raising rates:

"The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."

So Fed needs to be reasonably confident inflation will move back to 2%. Are we there yet?

Consumer inflation is not there yet, but inflation momentum (3-month annualized inflation) is hovering around 2.0% in the last three months to August, a bit lower than in the previous months (note: there's a 0.5pp gap between CPI an the target PCE inflation).

The minutes of July's FOMC meeting (FOMC: moving closer, but with no conviction) showed an increasing concern with downside risks to inflation -- and this was before a further drop in oil and commodity prices and further strengthening of the dollar. Late last year, when oil prices were collapsing, the Fed (Yellen, Fischer) made the case that low inflation was not a big concern -- it is a lagging indicator, so the focus should be on labor market slack. More recently, the Fed appears to get cold feet about moving off the ZLB and inflation concerns are making a comeback. Moreover, headwinds (e.g. stronger dollar) could strength the doves' case.

See the chart pack below.

Core inflation momentum moved from 1.5% in Jan to 2.4% in June and down to 2.0% in August.
Trimmed-mean CPI -- mentioned in the minutes -- moved from 1.2% to 2.1% and then to 1.9% in the same comparison.


The chart below looks at the average of the three measures of core inflation over a longer time span. Despite all the talks of deflation / lowflation, annual core inflation has barely moved since late 2011.



Core CPI at 1.8% and CPI ex energy also at 1.8% (unchanged from July)

It's all about energy...

...and goods. Services inflation running at a healthy 2.6%

Oil prices are spilling over to core. Core inflation excluding airfares is a bit higher.

Gasoline prices down again

Sticky-Price CPI growth remains stable -- a sign of anchored expectations

The Atlanta Fed produces a breakdown between 'sticky' vs 'flexible' prices and they argue 'sticky' prices (which is a weighted basket of items that change prices relatively slowly) "appear to incorporate expectations about future inflation to a greater degree than flexible prices".

The chart below shows that 'sticky' prices remain...well, sticky at around the 2% level annually. Moreover, sticky prices inflation is down but is running very close to 2%. This is in clear contrast to the 2009 to 2011 period which clearly showed concerns about future inflation.



Market-based inflation compensation is falling...this moves with oil prices and FOMC decided to downplay this by move late 2014.